Smoothing Asymmetric Shocks vs. Redistribution in the Euro Area: a Simple Proposal for Dealing with Mistrust

Heikki Oksanen

CESifo Economic Studies, 2016, vol. 62, issue 2, 332-375

Abstract: The euro area will not have a centralized budget, and smoothing of country-specific asymmetric shocks via private financial markets will develop only slowly. Mistrust among the governments has caused rigid, even pro-cyclical, fiscal policies. Smoothing mechanisms are absent due to the fear that the transfers would develop into permanent redistribution. For removing these deficiencies, we propose a transfer mechanism to be managed in periods of 7 years so that the cumulative balance of each country is cleared in equal instalments during the subsequent 7-year period. The transfers would smoothen asymmetric shocks and alleviate the rigidity of the fiscal rules.

Date: 2016
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